Financial Inclusion or Tokenism ?

Our Eleventh Five ear Plan (2007- 2012) aims at bringing about inclusive growth in the real sector. In the context of the policy paradigm of inclusive growth in the real sector, financial inclusion has become a policy priority. The basic idea is simple: access to affordable finance may enable the poor, especially the rural poor, to undertake economic activities like self- employment, or micro businesses.

The broader perspective of financial inclusion is provided by the Rangarajan Commission: “ financial inclusion is considered a prerequisite for empowerment, employment, economic growth, poverty reduction, and social cohesion.” A rather tall order indeed! Financial inclusion is thus the process of ensuring access to credit, or financial services generally, needed by vulnerable groups such as weaker sections and low income groups at affordable cost, from the mainstream institutions, like commercial banks, Regional Rural Banks, and Cooperatives, Reserve Bank of India (RBI) has taken a number of measures to accelerate this process of financial inclusion by setting specific targets of coverage of population by public sector banks (PSBs).

A major change introduced by RBI is that such coverage could take place not necessarily through a brick and mortar branch but also through any of the various forms of Information and Communication Technology (ICT) based models like Business Correspondents ( BCs). Under this BC Model banks have been permitted to use the services of various entities like the individual Kirana medical/ fair price shop owners, agents of small saving schemes, functionaries of well- run SHGs linked to banks.

Two funds were set up with NABARD: first, Financial Inclusion Fund for meeting the cost of developmental and promotional interventions for facilitating financial inclusion, secondly, Financial Inclusion Technology Fund to meet the cost of technology adoption. The overall Corpus of these funds was Rs. 500 crore each: these were enhanced by Rs. 100 crore each in 2010- 2011.

In November 2009, the RBI advised banks to draw up a roadmap to provide, by March 2011, banking services in every village with a population of over 2000. The target date has now been postponed to March 2012. About 73,000 villages have been allocated to various banks for provision of banking services.

While, in principle, the concept of financial inclusion is indeed in- controvertible, it is necessary to introspect on whether the way we are going about to achieve the results is the right way. Does the Target based approach, targets in terms of villages to be covered, or number of accounts to be opened, dilute the substance of inclusion? In this zeal for hundred per cent coverage, is the movement being reduced to tokenism? This article seeks to address these issues.

In retrospect, it can be seen that much before financial inclusion became internationally fashionable, the authors of nationalisations of banks in 1969, emerge as pioneers of financial inclusion. The expansion of branches of public sector banks was phenomenal in the post- nationalisation period, unprecedented in the history of world banking.

Banking growth in this era was in a manner of speaking organic. Banks were allocated areas for expansion like Lead Districts.

Further expansion was left to banks concerned: each bank would decide on whom to lend; how much to lend and so on. In other words, normal banking practices governed the expansion of banking.

In contract, the emphasis now seems to be on quantities. How many accounts has a bank opened? Since the inception of the scheme in November 2005, 50.6 million no-frills accounts”, which banks are required to open with very low or even nil” balances have been opened by banks, upto March 2010, with an outstanding balance of Rs. 5386 crore. Further more, in 2009- 10, banks were advised to provide small over drafts in such accounts, by March 2010 banks had provided 0.18 million over drafts with a total amount of Rs. 28 crore. General purpose credit cards (GCC) offered by banks at their rural and semi- urban branches are in the nature of revolving credit, entitling the holder to withdraw upto the limit sanctioned (Rs. 25,000). By March 2010, banks had provided credit aggregating Rs. 635 crore for 3.5 million GCC accounts.


This is a result of “command performance”, a case of directed credit. This massive target of number of accounts to be opened is putting a strain of banks’ resources, both human and financial. The Ministry of Finance is planning to compensate public sector banks for this additional burden imposed on them in terms rural penetration. Our submission is that RBI’s approach to financial inclusion in the sense of universal or near Universal coverage of households is flawed, or basically misconceived. Banking sector resources are, and would continue to be, limited.

Optimum utilisation of banking sector resources would demand a selective approach to credit extension. Ideally credit should chase productive activities and if this is

ensured, we could promote optimal use of banking sector resources. Spreading banking sector resources too thinly, which universal coverage necessarily implies, would not lead to optimise growth.

However, today financial inclusion has been reduced a game of numbers, a mere tokenism. Take, for instance, No frills Accounts’, we have discussed above. As Dr. Tarapore, former Deputy Governor, has printed out, only a tenth of these accounts are operational. What purpose on earth 90 per cent of such “ near dead” accounts serve?

Only RBI could provide an answer to this question. Because these accounts have stemmed from `targets’ and not grown organically, they are in a sorry state.

The point is let us not pursue the shadow of universal coverage but seize the substance of banking. Let RBI allocate areas to different banks for penetration but, leave the selection of borrowers to banks. Let there by no insistence on numbers. Then there will be the normal banking practices which govern the selection of borrowers, the quantum of credit to be given and so on. This approach would bring about healthy banking growth, facilitating growth in the real sector.